Moody’s Upgrades Outlooks for South Carolina, Tennessee

By Michael Aneiro

In Wednesday’s rating agency news, Moody’s Investors Service said it finished assessing the rating outlooks of five states 161 local governments with top triple-A ratings that Moody’s identified as indirectly linked to the U.S. government, affecting a combined $69 billion of debt. As a result, Moody’s has revised the outlook to stable from negative for two states and 119 local governments while the outlook remains negative for three states and 36 local governments.

The outlooks of South Carolina and Tennessee were revised to stable to reflect their relatively lower levels of financial and economic exposure to the U.S. The outlooks of Maryland, New Mexico and Virginia remain negative due to high concentrations of federal government employment and federal procurement.

“Maryland, New Mexico and Virginia have economies that are highly dependent on federal employment and federal spending,” said Nick Samuels of Moody’s states rating team, in a statement. “As a result, they are exposed to the risks posed by federal downsizing and spending cuts.”

Moody”s assigned negative outlooks to these issuers on August 4, following the August 2 confirmation of the U.S. government’s Aaa sovereign rating and assignment of a negative outlook.

“Today”s actions are based on an expanded evaluation of the exposure each municipality has to the U.S. government, including economic sensitivity to federal spending reductions, dependence on federal transfers and exposure to capital markets disruptions,” said Naomi Richman, a managing director at Moody’s, in a statement Wednesday. “Issuers with outlooks that remain negative are viewed as having greater exposure to potential cuts in federal employment and federal spending.”

Moody’s said its analysis includes metrics such as federal procurement activity, federal employment and healthcare employment as indicators of economic sensitivity. Medicaid expenditures for states and public hospital expenditures for local governments as indicators of direct exposure to federal spending are also considered along with the presence of short-term debt as an indicator of exposure to capital markets disruptions.

If the U.S. Aaa rating were to be placed under review or downgraded the ratings of municipal issuers with a negative outlook tied to the U.S. government would follow suit, Moody’s said.